BofA Says Fed Will Cut Rates in December — Followed by Two More in 2026

As of December 1, 2025, Bank of America Global Research has revised its outlook: it now expects the Federal Reserve to lower interest rates by 25 basis points at the December 9–10 meeting.

Moreover, BofA forecasts two additional quarter-point cuts in June and July 2026, potentially bringing the terminal federal funds rate down to 3.00%–3.25%.

This is a major shift: BofA previously expected rates to hold steady in December. The revision is largely driven by a weakening labor market and dovish signals from key Fed policymakers, including John Williams.

Why Did BofA Flip Its View?

• Labor market softness: Recent employment and labor-market indicators have cooled, prompting concern among rate-watchers that economic growth may be weakening.
• Dovish Fed commentary: Comments from influential Fed officials suggest openness to rate cuts sooner than previously thought, increasing confidence that December could bring action.
• Leadership expectations: BofA signals that their outlook incorporates not just economic data — but also potential changes in Fed leadership next year, which could tilt policy toward further easing.

In short: a mix of economic softness and shifting Fed sentiment has reshaped market expectations — from “maybe rate hold” to “likely rate cut.”

What This Could Mean for Markets, Credit & Assets

Bond & Fixed Income Markets

Lower expected rates generally push yields down. That could lift bond prices — especially medium- to long-term Treasuries. Mortgage rates may soften, which could support refinancing activity and relief for homeowners and mortgage lenders.

Credit and Bank Sector

Lower rates ease borrowing costs, which might boost credit demand — but could pressure net interest margins for banks. Regional banks and brokers may see margin compression, forcing strategic shifts.

Equities, Growth & Tech

Easier monetary policy often fuels risk assets. Growth and tech stocks may benefit, especially those sensitive to discount rates. Lower rates could also revive M&A and investment activity among capital-intensive firms.

Options Market — Where Flow Could Spike

Expect increased implied volatility around rate-sensitive names. Long-dated calls might pick up on growth hopes; puts could surge if banks warn margins are shrinking. Interest-rate-sensitive sectors — financials, real-estate, REITs — may see notable options flow action on Unusual Whales.

Stocks & Sectors to Watch (via Unusual Whales)

• Financials / Banks — rate cuts will pressure earnings margins. Watch for flow in regional banks and big lenders.
• Real Estate / REITs — lower rates may support REIT valuations and drive capital flows into real estate assets.
• Growth & Tech — any restart in investor risk appetite could favor tech names, especially those with long-duration growth expectations.
• Consumer Discretionary — cheaper borrowing could boost consumer credit and spending, benefiting consumer-focused equities.

Tracking options flow, GEX exposure, and volatility shifts on these names could reveal early signals of how markets price in the new rate path.

What Could Go Wrong — Key Risks to Watch

• Inflation surprise: If inflation remains sticky, the Fed may reconsider cuts — which would blow up expectations and cause volatility to spike.
• Credit-spread tightening or banking stress: Rate cuts may hurt bank profitability; if margins shrink sharply, financial stocks could underperform or trigger a broader sell-off.
• Policy misalignment: If fiscal stimulus coincides with aggressive rate cuts, overheating could occur — bringing rapid swings in markets.
• Volatility in rate-sensitive sectors: Real estate, REITs, and bond proxies may see sharp swings if markets reprice expectations quickly.

What Traders Should Monitor in the Near Term

• Fed commentary ahead of the December 9–10 meeting. Especially comments from rate-setting members.
• Inflation data and labor market reports — any upside surprises could derail the cut narrative.
• Options flow & open interest changes in rate-sensitive sectors (financials, real estate, REITs, growth).
• Yield curve shifts — especially the spread between short- and long-term Treasuries.
• Bank earnings previews — if any lender signals margin pressure, that could lead to re-evaluation across financials.

Why This Matters for You

The shift from rate-hold to multiple cuts rewrites the macro playbook — and fast. Markets that have priced in steady (or rising) rates may need to reset. For traders, that means opportunity: volatility, rotation, hedging, and asymmetric plays. Unusual Whales shines when macro regimes shift.

Create a free account and position yourself ahead of the rally or the pain.
https://unusualwhales.com/login?ref=blubber